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June 6, 2008
Ms. Lori McWilliams
Village of Tequesta
345 Tequesta Drive
Tequesta, Florida 33469-0273
Re: Tequesta Public Safety Officers Pension Trust Fund
Dear Lori:
As requested, we are providing information related to the method of determining actuarial value of
assets. As you are likely aware, the actuarial value of assets is used for purposes of determining
annual funding requirements.
Currently the actuarial value of assets is set equal to market value. Under the proposed method,
the difference between actual returns and expected returns at 8.0% is determined annually. Each
year, 20% of this difference will be recognized in the actuarial value until all the difference is
recognized. The result of this is a smoothed actuarial value which fluctuates less than the market
value. This translates into lower volatility of funding requirements.
The first exhibit illustrates the mechanics of the new method if it had been in effect during the year
ended 9/30/2007. The second exhibit compares the annual market value asset returns to returns
using the proposed method for a sample plan. You will note the standard deviation (volatility
measure) is considerably less for the proposed method
If you have any questions about these illustrations, please let us know.
Sincerely yours,
~~-~~
J. Stephen Palmqui , ASA
Senior Consultant and Actuary
JSP/dmh
•
Village of Tequesta Public Safety Officers Pension Trust Fund
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Calculation of Actuarial Value of Assets (New Method) on 9/30/2007
A. Beginning of Year Assets (Before Subtracting State Reserve)
1. Market Value $3,373,976
2. Actuarial Value $3,373,976
B. End of Year Market Value of Assets $4,346,307
C. Net of Contributions Less Disbursements $482,810
D. Actual Net Investment Earnings $489,521
E. Expected Investment Earnings $289,230
F. Expected Actuarial Value $4,146,016
End of Year: A+C+E
G. End of Year Market Value Less
Expected Actuarial Value $200,291
H. 20% of Difference $40,058
I. End of Year Assets
1. Actuarial Value: F + H $4,186,074
2. Actuarial Value
Within 80%to 120%
of Market Value $4,186,074
K. State Contribution Reserve $265,698
L. Final Actuarial Value of Assets $3,920,376
M. Recognized Return: E+H $329,288
N. Recognized Rate of Return 9.1 %
O. Market Value Rate of Return 13.5%
G:\ClientlJ S P\TEQUESTA\Excel\[ActuarialValueAssets.xls)Sheet2
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Comparison of Rates of Investment Return Recognized Under Different Asset Smoothing
Methods for a Sample Public Pension System
Year Ended
September 30 Return on Market
Value Recognized Return Under
Proposed Method
1996 11.7% 9.5%
1997 27.2% 13.1
1998 0.2% 10.1
1999 17.9% 11.8%
2000 3.8% 10.1
2001 -4.3% 7'.1
2002 -7.7% 1.5%
2003 13.1 % 5.9%
2004 8.0% 6.2%
2005 8.4% 6.6%
Average Returns Over
10 Years 7.4% 8.1
First 5 Years 11.7% 10.9%
Last 5 Years 3.2% 5.4%
Standard Deviation 10.4% 3 4%
Range from Lowest 34.9% 11.6%
to Highest
G:\Client\J S P\TEQUESTA\Excel\[ActuarialValueAssets.xls]Sheet2
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June 6, 2008
Ms. Lori McWilliams
Village of Tequesta
345 Tequesta Drive
Tequesta, Florida 33469-0273
Re: Tequesta General Employees Pension
Dear Lori:
As requested, we are providing an explanation of the relationship between performance of trust
assets and funding requirements. The Plan is funded using the Aggregate Cost Method. Under
this method, a change in the asset value has a direct impact on the funding requirement.
The formula illustrating this relationship is shown below:
(A-E) X S/PVS where,
A =Actual asset return
E =Expected asset return assuming 8.0% per annum
S =Current aggregate pension payroll of participants
PVS =Present value of a future pension payroll measured in today's dollars
The ratio of S to PVS at 10/01/2007 was approximately 0.12 for the General Employees Plan and
0.10 for the Public Safety Plan. Therefore, the annual Village contribution will increase or
decrease by about 12% or 10% of the difference between actual and expected returns. If, for
example, the actual return for the 2008 fiscal year for the General Plan is $0 and the expected
(8%) return is $100,000, the Village's annual payment would increase by $12,000.
If you have any questions about this illustration, please let us know.
Sincerely yours,
,~ ~
i
J. Stephen Palmquist, ASA
• Senior Consultant and Actuary
JSP/dmh